In my previous post we covered some very general commodity trading basics primarily dealing with what types of commodities are available to be traded on the various commodity exchanges throughout the U.S. and some international markets. I had to laugh because I realized that I didn’t make any mention whatsoever of the actual exchanges themselves. For those who are just now warming up to the whole concept of futures trading and how it’s done (and where it’s done), the primary vehicle or entity that facilitates the buying and selling of futures contracts is the commodity exchange. In the U.S., there are several major commodity exchanges, and each one has its own set of commodities that are traded on a daily basis. The Chicago Board of Trade (CBOT) is where most of the major grains are traded such as corn, wheat, and soybeans. There is also an ancillary exchange in Chicago known as the Chicago Climate Exchange (CCE) where they trade—get this—greenhouse gas emission allowances, or carbon credits. Don’t ask me to explain that because I simply don’t know. Again, the more you read this blog and the more you become accustomed to my writing style, the more you’ll realize that I’m a very simple guy when it comes to trading futures, because after 7 years of being in the trading game and 7 years of observing, paper trading, and real-money trading the markets, I have learned that the simpler you keep this thing, the better. You don’t have to know every single detail as to how the commodity exchanges do what they do, you just have to know that when you buy, it’s bought, and when you sell, it’s sold. But, I digress…back to the exchanges. Another major commodity exchange is the New York Mercantile Exchange. This is where your metals (copper, silver, etc.) and energies (oil, natural gas, etc.) are sold. In my humble opinion, it’s also where the “scene of the crime” is right now, as far as why our gas prices are so high. Speculation has completely dominated the crude oil landscape, and the reason why oil prices are so high (and subsequently gas at the pump is so high) has nothing to do with supply and demand, but has everything to do with powerful inside interests that are basically pimping the markets (and the public) for their own benefit. This is another topic for another time but suffice it to say, there’s no such thing as “efficient markets” in the world of commodity trading; there are only those who are “in the know” and those who are not. There is only the weak money and the strong money. The weak money is basically the uninformed public, and the average speculator, who provide fantastic liquidity to the markets through their ignorance and willingness to jump into positions without any knowledge of what they are truly up against. If they were to simply study a price chart of the commodity that they want to trade, they would find out a little more about what type of move it’s making, and what type of trading action they need to take so that they won’t end up holding the “doo-doo” end of the stick, so to speak. But again, I will get to this a little later, as I have to finish my description of the commodity exchanges.
You also have the New York Board of Trade (NYBOT), which is where several of the foods/softs are traded, such as orange juice, coffee, sugar and cocoa, but in more recent years, they have added ethanol as a “trade-able” commodity as well. The NYBOT was featured in one of the most famous of 80’s movies, “Trading Places”, where a couple of the main characters were trying to single-handedly corner the orange juice market. Then there’s the International Monetary Market (IMM), where your currency futures (think U.S. Dollar, Japanese Yen, etc.) and interest rate futures (think Eurodollar and 1-Month Libor) are traded. The IMM is a subsidiary of the Chicago Mercantile Exchange (CME, also known as “The Merc”), where your meats (live cattle, pork bellies, etc.) are traded, as well as lumber, and your major equities as well (think S&P 500, NASDAQ 100, etc.). You also have the exchanges located in the Midwest, such as the Kansas City Board of Trade (KCBT) as well as the Minneapolis Grain Exchange (MGE), where the other types of wheat (hard red, spring, etc.) are traded. In summary, hopefully if I haven’t bored you to complete exhaustion by now, you will have gotten a better grasp on what types of commodity exchanges are out there. By no means have I listed every single one…I just don’t feel like doing that (LOL), but the ones I have mentioned are the most prominent ones, and the ones that I have personally traded through many times. These exchanges (most of them anyway) have very long histories, and many, many fortunes have been made and lost at these places. The markets are no place for the nervous trader, or the person who trades with what I call “scared money”, where you are obsessing over every tick and emotionally tied to every price movement. If this describes you, you are not ready for futures trading to any degree. The successful futures trader needs to have nerves of steel, and an emotional indifference to the market’s movements. I will cover this side of futures trading in more thorough detail in upcoming posts; it’s a huge subject, but in my mind the most important one to master for you to become a successful commodity trader, or stock trader, or any type of trader.
That’s gonna wrap it up for this installment of commodity trading basics. I encourage you to begin studying the price charts (especially historical price charts) of the different commodities to get a feel for their various price ranges and “personalities”, because each market does indeed have its own personality. We’ll tackle this later in a future episode of Commodity Trading Information—until then, keep on learning!
Saturday, July 12, 2008
Thursday, July 10, 2008
Commodity Trading Basics
I decided to start this blog as a way to explain some commodity trading basics to beginners or people who are not very familiar with trading commodities based on technical analysis and studying commodity price charts. For some reason, I feel more drawn to the beginner than anything else, mainly because I remember what it was like when I was first starting out, not knowing a clue but yet very eager to learn. I first learned about futures trading the same way many of you out there first learned about it, and that was through Ken Roberts. For those who may not know who he is, he basically created an educational package that teaches the basics of how to trade futures using price charts as your guide. There are thousands of people all over the world that came to understand the whole business of commodity trading through Ken Roberts’ course, so I can’t hate on him to any degree, although the more “official” futures trading analysts, commodity industry experts, and so forth don’t put much credence in his methods, because his techniques are very simple and geared towards the beginner. The funny thing is, I can honestly say that you don’t need to know much past the basics to make money in the futures markets anyway. The commodity markets are an unruly beast, and for some reason we as human beings love to make things more complicated than they are, thus making it even harder for us to make sense of something as involved as futures trading. The truth of the matter is, you can do just fine with a price chart and a basic understanding of support and resistance, as well as something known as the 50% retracement level, which I will cover in more detail in subsequent posts.
If someone asks me what markets I like to trade the best, I usually respond by saying whichever one has a chart that looks good. I seem to gravitate towards the grains for whatever reason…I have traded corn and wheat probably more than anything else. For those that are not yet fully familiar with the different instruments that are available to be traded, here’s a quick primer: You have the Grains, which are basically corn, wheat, soybeans, soybean meal, soybean oil, rice, canola, barley (a.k.a. Western Barley), and oats (which are still somewhat the “Wild Wild West” of the grains). There are also some categories of grains, such as different types of wheat (spring wheat, red wheat, etc.) and even some soybean variations traded on foreign markets. Then, you have the Metals, which are gold, silver, platinum, copper (also known as High Grade Copper), palladium (which I really don’t know who trades in that one), and aluminum. Then you have the Meats, which are comprised of pork bellies, lean hogs, live cattle, and feeder cattle. For some reason, I haven’t really touched the meats all that much. I have traded a couple of feeder cattle options, but that’s about it. Maybe I have a “vegetarian approach” to the markets (baaaad joke). Next up, there’s the Softs, which are basically goods that can’t be classified properly anywhere else, such as cotton, orange juice, lumber, cocoa, sugar (also known as Sugar # 11—don’t know what the # 11 stands for), and coffee. Then you have the Currencies, which I really don’t feel like listing all of them because there’s a bunch of them (how many countries are out there?), so I’ll give some of the main ones: U.S. Dollar, Swiss Franc, Canadian Dollar, British Pound, Japanese Yen, Mexican Peso, Euro FX, Brazilian Real, on and on, more than I feel like naming. Then, you have the Energies, which are crude oil (public enemy number one right now), heating oil, gasoline, natural gas, and ethanol. After that, there’s the Indices, which are basically derivatives pegged to some type of popular index, such as the S&P 500, the NASDAQ 100, the Russell 2000, the Dow Jones, and on & on. I have never really delved into the world of the Indices; I just like what I like, and that’s mostly the Grains, Metals and Softs. Last but not least you have the Financials, which includes the bond market—the largest market out there. If you think about it, that makes sense, because nothing known to man can be bigger than government debt. Also included in the Financials category is the Eurodollar, the 1-Month Libor (which stands for London Interbank Offer Rate), and other instruments that are normally tied to some type of interest rate. I don’t fool with these too much either, because I just have a slight case of paranoia about any market where one announcement from some suit at the Federal Reserve can send the entire market into a tailspin in short order. I guess, when I think about it, I like the more tangible and physical types of commodities, because for some reason they just make more “sense” to me and seem more “real” to me.
At any rate, I just realized how long this post is, and it’s time to sign off. We’ll dig into some more commodity trading basics in future posts, such as the different types of commodity exchanges and so forth. Until then…happy futures trading!
If someone asks me what markets I like to trade the best, I usually respond by saying whichever one has a chart that looks good. I seem to gravitate towards the grains for whatever reason…I have traded corn and wheat probably more than anything else. For those that are not yet fully familiar with the different instruments that are available to be traded, here’s a quick primer: You have the Grains, which are basically corn, wheat, soybeans, soybean meal, soybean oil, rice, canola, barley (a.k.a. Western Barley), and oats (which are still somewhat the “Wild Wild West” of the grains). There are also some categories of grains, such as different types of wheat (spring wheat, red wheat, etc.) and even some soybean variations traded on foreign markets. Then, you have the Metals, which are gold, silver, platinum, copper (also known as High Grade Copper), palladium (which I really don’t know who trades in that one), and aluminum. Then you have the Meats, which are comprised of pork bellies, lean hogs, live cattle, and feeder cattle. For some reason, I haven’t really touched the meats all that much. I have traded a couple of feeder cattle options, but that’s about it. Maybe I have a “vegetarian approach” to the markets (baaaad joke). Next up, there’s the Softs, which are basically goods that can’t be classified properly anywhere else, such as cotton, orange juice, lumber, cocoa, sugar (also known as Sugar # 11—don’t know what the # 11 stands for), and coffee. Then you have the Currencies, which I really don’t feel like listing all of them because there’s a bunch of them (how many countries are out there?), so I’ll give some of the main ones: U.S. Dollar, Swiss Franc, Canadian Dollar, British Pound, Japanese Yen, Mexican Peso, Euro FX, Brazilian Real, on and on, more than I feel like naming. Then, you have the Energies, which are crude oil (public enemy number one right now), heating oil, gasoline, natural gas, and ethanol. After that, there’s the Indices, which are basically derivatives pegged to some type of popular index, such as the S&P 500, the NASDAQ 100, the Russell 2000, the Dow Jones, and on & on. I have never really delved into the world of the Indices; I just like what I like, and that’s mostly the Grains, Metals and Softs. Last but not least you have the Financials, which includes the bond market—the largest market out there. If you think about it, that makes sense, because nothing known to man can be bigger than government debt. Also included in the Financials category is the Eurodollar, the 1-Month Libor (which stands for London Interbank Offer Rate), and other instruments that are normally tied to some type of interest rate. I don’t fool with these too much either, because I just have a slight case of paranoia about any market where one announcement from some suit at the Federal Reserve can send the entire market into a tailspin in short order. I guess, when I think about it, I like the more tangible and physical types of commodities, because for some reason they just make more “sense” to me and seem more “real” to me.
At any rate, I just realized how long this post is, and it’s time to sign off. We’ll dig into some more commodity trading basics in future posts, such as the different types of commodity exchanges and so forth. Until then…happy futures trading!
Friday, July 4, 2008
Futures Trading: Some Things You Should Know
Some commodity trading basics: The markets are the markets. You can’t make them move, you can’t make them rise or fall, you can’t do anything but follow their flow. The sooner you learn this, the better off you’ll be, and the more money you’ll save yourself. Most investors, traders, and other market participants are simply guessing. They have their indicators, they have their moving averages, they have their commitment of traders reports, they have their Palmer Drought Index stats, they have their in-depth analysis, etc. but at the end of the day it’s still pretty much a 50/50 shot. You’ll find out quickly whether you were right or whether you were wrong, and that’s all there is to it. If you get in, and the position moves against you to the point where it’s damaging your account…hey, buddy, you were wrong. Swallow your pride, fold your hand, and move on. Live to trade another day. But those who think they can argue with the market, those who try to “make” the market do what they want it to do, those who hope & wish that their losing position will turn around, etc., they’re in for a rude awakening, and most of the time it doesn’t hit until their whole account is blown out and they're strapped with margin calls. The market doesn’t care if you’re long or short. The market doesn’t care if you trade corn, wheat, orange juice or the Eurodollar. The market doesn’t care if you trade one lot or one hundred thousand lots. The market doesn’t care if you make millions or lose millions. The market is truly not a respecter of persons.
I just keep thinking about the analogy of the commodity markets being like the ocean. The ocean is what it is. If you are a surfer who can brave the waves and ride them well, then more power to you. But if you are an unskilled surfer, hey, you might get your butt killed out there when the waves swallow you up. It isn’t the ocean’s fault; that’s just the nature of the beast. It took me a long, long, LOOONG time to finally come to terms with that where the market was concerned. I spent many a day trying to “make” the market move. I spent many a day hoping & wishing that my jacked-up position would somehow radically turn around. I spent many a trade just knowing that I was “right this time”, and that the market “has to do” this or that. Then I finally realized: At the end of the day, beyond all the fundamental analysis, beyond all the technical analysis, beyond all the supply and demand talk, beyond all the rate hike talk, beyond what the Fed is doing or what the ECB is doing, the bottom line is, once you enter your position, you’re either going to be right or you’re going to be wrong. And NOTHING is going to determine that but the market itself. So the best thing you can do is become adaptable to how the market treats your position. This is translated (in more familiar terms) into “cut your losses and let your winners ride”, which I have found to be one of the most difficult disciplines I have ever engaged in my whole life. Once you learn how to humble yourself, don’t fight the flow but go with the flow, and let the market determine what you’re going to do (instead of the other way around), you’ll become a much better trader (and person) for it. If there’s one thing I could say about my experience in trading commodities thus far, it is that trading is truly a process of self-discovery. Every weakness, every stupid compulsion, every emotional idiosyncrasy you have is exposed and dealt with through the trading process. Your very foundational ideas about money and your connection with money are dealt with through trading. Your attitude towards money (and the place that money holds in your life) will be revealed through trading. You’ll find out whether money is your servant or your master. You’ll find out why you make the dumb decisions that we all sometimes make. You’ll find out why you hate being wrong, and why that’s the one thing that will hold you back the most. You’ll find out just how much emotionalism can distort your common sense and good judgment. And it all comes through an avenue that I personally least expected it to come through, and that was futures trading. So if it’s possible to thank an entity, I thank the markets for teaching me the hard lessons about trading commodities. I also thank God that I didn’t get completely wiped out (and subsequently become homeless) from the extremely stupid mistakes I made early in my trading career. You want a true commodity trading education? Get in the game and let the markets teach you about yourself. You’ll be surprised at how much you can learn.
I just keep thinking about the analogy of the commodity markets being like the ocean. The ocean is what it is. If you are a surfer who can brave the waves and ride them well, then more power to you. But if you are an unskilled surfer, hey, you might get your butt killed out there when the waves swallow you up. It isn’t the ocean’s fault; that’s just the nature of the beast. It took me a long, long, LOOONG time to finally come to terms with that where the market was concerned. I spent many a day trying to “make” the market move. I spent many a day hoping & wishing that my jacked-up position would somehow radically turn around. I spent many a trade just knowing that I was “right this time”, and that the market “has to do” this or that. Then I finally realized: At the end of the day, beyond all the fundamental analysis, beyond all the technical analysis, beyond all the supply and demand talk, beyond all the rate hike talk, beyond what the Fed is doing or what the ECB is doing, the bottom line is, once you enter your position, you’re either going to be right or you’re going to be wrong. And NOTHING is going to determine that but the market itself. So the best thing you can do is become adaptable to how the market treats your position. This is translated (in more familiar terms) into “cut your losses and let your winners ride”, which I have found to be one of the most difficult disciplines I have ever engaged in my whole life. Once you learn how to humble yourself, don’t fight the flow but go with the flow, and let the market determine what you’re going to do (instead of the other way around), you’ll become a much better trader (and person) for it. If there’s one thing I could say about my experience in trading commodities thus far, it is that trading is truly a process of self-discovery. Every weakness, every stupid compulsion, every emotional idiosyncrasy you have is exposed and dealt with through the trading process. Your very foundational ideas about money and your connection with money are dealt with through trading. Your attitude towards money (and the place that money holds in your life) will be revealed through trading. You’ll find out whether money is your servant or your master. You’ll find out why you make the dumb decisions that we all sometimes make. You’ll find out why you hate being wrong, and why that’s the one thing that will hold you back the most. You’ll find out just how much emotionalism can distort your common sense and good judgment. And it all comes through an avenue that I personally least expected it to come through, and that was futures trading. So if it’s possible to thank an entity, I thank the markets for teaching me the hard lessons about trading commodities. I also thank God that I didn’t get completely wiped out (and subsequently become homeless) from the extremely stupid mistakes I made early in my trading career. You want a true commodity trading education? Get in the game and let the markets teach you about yourself. You’ll be surprised at how much you can learn.
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